Law Times

Law Times • November 8, 2010 NEWS PAGE 3 Appeal court orders assessment of fees Ruling suggests counsel should revisit retainer agreements, lawyer says BY MICHAEL McKIERNAN Law Times I ntra-corporate litigators must rethink the way they construct retainers in the wake of an Ontario Court of Appeal decision to refer the fees of two Toronto law fi rms for assessment after they had already been paid, according to a practitioner in the area. In a split 2-1 decision, the court granted Echo Energy Canada Inc.'s application for an assessment of fees paid by the company to Lenczner Slaght Royce Smith Griffi n LLP and Voorheis & Co. LLP that totalled 840,000. Echo Energy challenged the fees following a bitterly contested change of manage- ment. It argued the old admin- istration had failed to check them for reasonableness. In its ruling, the Court of Appeal found it had shown special cir- cumstances, a precondition for assessment of paid accounts under the Solicitors Act, and thereby reversed an earlier rul- ing by a Superior Court judge. Lenczner Slaght was retained by the company after one di- rector, Salvatore Fuda, became embroiled in a dispute with several other directors, includ- ing Echo Energy's president. Several lawsuits were launched on behalf of Fuda, the compa- ny, and the other directors. Al- though the law fi rm had a writ- ten retainer with Echo Energy, the court found it didn't cover the full scope of the separate actions, while Voorheis had no written retainer at all. Th e Fuda faction eventually pre- vailed over the president and other directors on the board. In the wake of the ruling, Antonin Pribetic, a lawyer with Steinberg Morton Hope & Israel LLP, says litigators need to pro- tect themselves from retaliatory assessments in the event they end up representing the losing side in a takeover battle. "You re- ally have to revisit your retainer agreements. You can't rely on the boilerplate anymore. We'll have to look at it with a more jaun- diced eye and have some specifi c wording or clauses with respect to change of control." Patricia Virc, legal coun- sel at Echo Energy, says she's pleased with the ruling. "I was very happy to have won it after a bad experience in the Superi- or Court. It's not about depriv- ing lawyers of their fees. It is all about maintaining the integrity of the profession and the trans- parency of billing. In a context when the decision-maker is spending other people's money, the lawyers have to be a little careful to ensure that the con- stituents whose money is being spent are actually considered." Ben Zarnett, a partner at Goodmans LLP who repre- sented Lenczner Slaght and Voorheis at the appeal court, wouldn't comment on the case. Ronald Slaght, managing partner of Lenczner Slaght, also declined to speak about it, while Wesley Voorheis of Voorheis & Co. didn't return phone calls by press time. Th e problems began in November 2007, when Fuda became suspicious about the company's reported gas re- serves. He tried to have an independent engineer ap- pointed to confi rm them but was rebuff ed at a board meeting, which prompted Fuda to nominate two new appointees selected by him to the board. Meanwhile, Gary Conn, then Echo Energy's presi- dent, claimed Fuda had ob- tained his shares illegally. As a result, the company formed a special committee to handle the explosion of lawsuits, includ- ing litigation by Fuda against all three of its members. In November 2008, Supe- rior Court Justice Geoff rey Morawetz ruled Fuda's shares had been purchased legally and his directors were appointed, which gave his group control of the company. Nevertheless, Morawetz called both Fuda and Conn's credibility as wit- nesses into question. In the meantime, a con- sulting engineer appointed by the new management eventu- ally found signifi cant declines in the company's gas reserves, which forced it to write them down to $12 million from $44 million. In the intervening pe- riod, Conn had authorized 13 accounts with Lenczner Slaght with making the decisions about the conduct of the lit- igation, including payment of the accounts," Rosenberg wrote. "Specifi cally, the ap- plication judge overlooked evidence suggesting that Mr. Conn was spending the appellant's money without regard for the impact on the appellant." Rosenberg said Brown 'You can't rely on the boilerplate any- more,' says Antonin Pribetic. worth $520,000. Lenczner Slaght had recommended the company also hire Voorheis, who rendered fi ve accounts worth $317,000. Th e new management ap- plied for the assessment in Sep- tember 2009. But in January, Superior Court Justice David Brown found they had failed to show that the directors on the litigation committee hadn't acted in the best interests of the company. Reversing that decision, Court of Appeal Justice Marc Rosenberg, writing for the ma- jority, said Brown had erred by viewing the case from the lawyers' perspective rather than from the client's point of view. "By taking this approach, he failed to consider the evidence showing that the appellant was not well served by those within the company tasked should have considered Morawetz's earlier fi ndings that Conn and his fellow directors on the litigation committee had an interest in preserving the status quo. He also ruled the size of the legal bills at $840,000, when com- pared with the company's revenues of $2.8 million dur- ing the same period, went some way towards proving special cir- cumstances in the case. "It cannot be forgotten that it was the appellant, a public company, that was paying the bills, not the directors," Rosen- berg wrote. According to Pribetic, the court was right to reinforce the "client focus" when determin- ing whether special circum- stances exist. "It's funny that it's called the Solicitors Act because really it's all about the client," he says. "It's a form of consumer protection. Th e ethi- cal lawyer has to put the cli- ent's interest fi rst. It reinforces the view that lawyers are in a unique position among profes- sions. Our case is always sub- ject to scrutiny, notwithstand- ing the accounts are paid." In his dissenting opinion, Court of Appeal Justice Ste- phen Goudge repeated a fear expressed by Brown that com- panies involved in intra-cor- porate litigation might fi nd it diffi cult to retain counsel if the accounts could be assessed "for no other reason than that the lawyers provided legal services to the losing side." Pribetic agrees that could be a problem but suggests lawyers can cover themselves by tailor- ing their retainers at the outset. Apart from change-of-control clauses, he says lawyers could insert arbitration clauses to avoid the assessment process. Pribetic adds they could also ensure all directors ap- prove the retainer. In fact, the Court of Appeal refused to order an assessment on $140,000 in fees paid to Mc- Carthy Tétrault LLP because all of the directors, including Fuda, had signed off on its ap- pointment in the matter. For her part, Virc says law- yers should never be afraid to submit their accounts for re- view. "If you're going to deliver a fair account, there's not going to be much of an adjustment anyway," she says, noting she hopes the process will result in a reduction in the company's fees. "We wouldn't have gone through this if we weren't hop- ing for a reduction. I don't know how easy it's going to be. To the extent they will be reduced at all, they're going to have to make a refund to the company, which is a little harder than just writing down your account before being paid." LT Liquor and Host Liability Law in Canada Lorne Folick, Michael Libby and Paul Dawson Understand the risks and duties arising from the sale or service of alcohol This is the first resource to address all aspects of liquor liability in commercial, employment and social host settings. It includes analysis and discussion of all the leading cases and key legislation from across the country. 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• Cover
• Revising Retainers
• Victim Impacts
• Focus On Family Law